Wednesday, 17 March 2010

An alternative to Pedro's provocative idea: dumping the euro. I know that economists are notorious in making predictions. Still, I think that it is pretty safe to assume that if the Portuguese economy does indeed have another "lost decade" (that is, if it remains stagnated for a prolonged period of time), it is very likely that in 10 years time we will be discussing how and when we will leave the euro. The country will not take another 10 years of low growth, high unemployment and high emigration (which, yes, is back big time) without politicians (and economists) starting to consider this heretic possibility. I know that leaving the euro is risky and costly, but I would not be surprised if this possibility becomes increasingly attractive if stagnation persists. (If it is not us, this is certainly a possibility for Italy or Greece).

Personally, and although I think that there is overwhelming evidence that the euro has been the main culprit (together with the world trade liberalization and the EU's expansion to Eastern Europe) for the current woes, I also do believe that the costs of leaving the euro are probably too high. Also, in the long run, there might be some efficiency gains associated with belonging to a strong currency like the euro. In other words, it might not be worth it to dump the single currency.

Nevertheless, as we all know, not only in the long run we are all dead, but also, in the medium term, if stagnation persists, it is very likely that a populist politician might persuade the electorate that the euro is the root of all our ailments. And, in a scenario of 10-20 "lost" years, who could blame him/her for it?

4 comments:

I reckon that we would still suffer from high emigration rates even if the economy was growing 3% per year, as young people, particularly those who are highly qualified, will always find better career development prospects overseas, as Portugal does not have world class universities or many Fortune 500 companies, nor it will have them so soon regardless of GDP growth.So I think it is a bigger priority to attract qualified people from overseas to work here rather than prevent the inevitable brain drain. Moreover, the emigration is nowadays not so worrying as it used to be 20, 30 or 40 years ago. People no longer relocate permanently, they may leave, work for a year or two, or do a Masters degree or PhD degree overseas, then come back, stay for some time in Portugal, so the migration pattern has become very dynamic and complex, and so the mere figures of emigration are no longer accurate. Of course many will never come back, but that's inevitable. Portugal has a reasonably good football league for European standards, but the best players will always end up leaving.What's not so predictable or expected is that many of those highly qualified people will end up returning, for some reason, and its those and qualified foreigners who see Portugal as an interesting place to work that the country needs to lure in.

The question is not merely wether it would be desirable (or at least less painful) to leave the euro. We might have to face the fact that leaving the euro is the only way out in case our external imbalances keep deepening - and I cannot see how we would reduce our external debt burden without a period of strong economic growth (which I do not foresee). And as german finance minister Schauble has put it and worse, as Chancellor Merkel reiterated, leaving the euro is at hand for those economies who cannot restore competitiveness and keep sound public finances.

To my mind, it is now not in our hands whether or not to leave the euro in the (more or less) near future. It is up to the big guns in europe to decide if they are willing to pay the price of deepening Europe's underperformance and thus punishing the lack of discipline of the southern European economies with a likely exclusion of the Eurozone, forced by the worsening of their external debt burden. If that is the case (though it need not be so) I do not see how it will be possible for us (and others) not to abandon the Euro.

The price though would be much too high for everybody, Germany and the like included. I cannot see this happening without a major political crisis within an already politically feeble EU - because it is not only the "meaningless" portuguese economy at stake. So the question of protectionism would be very much a major political issue which, I am afaid, would dent the European Union prospects (and not merely the monetary union).

Even though I believe that dropping the Euro will be the way to go for Portugal and the remaining EMU "losers" (does not mean that I agree with it), I think that it will not by itself avoid another "Lost Decade". Portugal has a serious institutional (and Political) problem that is really depressing growth. Our instituional situation is not unique in (Western) Europe, but if we do not start reversing effectively this situation, probably in 10 or 15 years time we will stand alone at the bottom. The path to growth may not be an easy one, but it is time to make an effort in order to leave this bad (and apparently stable) "Steady State".

I also believe that even if a "populist politian" arguing that the Euro should be dropped wins over the elections, when the decision moment comes he/she will probably do what portuguese politians usually do about European issues: Follow our European friends. We depend too much on them and nobody want to take the risk of a bold decision. Can even happen what is saying on the last comment, maybe the big ones will decide to kick us out of the EMU. Either way, if the EMU "losers" leave, it would be a major setback on the "European Integration". However, perhaps we are not yet financially ready for it.